I am the Founder of Community of Liberty, a chapter based organization committed to pursuing the art of living in liberty, a member of the Publication Committee of the Claremont Review of Books, an Advisor to TheGold StandardNow.org, and a juror for the Bastiat Prize for Journalism. I have just published with my co-author Ralph Benko the booklet, "The 21st Century Gold Standard: For Prosperity, Security and Liberty," now available as a free download at AGoldenAge.com. I bring to my columns an extensive background in the investment management business, including my experience as an equity portfolio manager, strategist, president of my former firm’s retail sales and marketing subsidiary and member of the parent firm’s management committee. As such, I have been a student and observer of the political/economy and its affects on markets, businesses, and my own business for more than 30 years.

The Rising Price Of the Falling Dollar

Do you know why oil and prices are moving sharply higher? Some blame the oil companies, charging they are manipulating prices. Others cite U.S. sanctions on Iran and the threat of a military encounter that would disrupt the flow of oil from the Middle East.

Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the U.S. oil production.

Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.

The cost of this deception goes well beyond the vilification of the oil industry and free markets. The real price of the on-going debauchery of the dollar is measured by the loss of our prosperity and the debasement of our liberty.

Neither the dollar, nor the price of individual items are fixed. Changes in the relative prices of goods and services occur because of technological change or shifts in supply or demand. The price of computers and televisions fall relative to the price of, well, just about everything. On the other hand, the freeze earlier this winter in Florida reduced the supply of oranges, leading to an increase in the price of orange juice. But, the value of the dollar also changes, usually in ways that are imperceptible over short periods of time. As a consequence, when the dollar price of gasoline rises 6% in a month, as it did in February, it appears that the price of gasoline is up, rather than the value of the dollar is down.

To see more clearly how the price of the dollar has changed, it helps to view price changes over a 10 year period. Since 2002, the price of a barrel of oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest that oil companies had enough power to impose such a price increase, or that speculators are responsible for a quadrupling of the price of oil is, on its face, preposterous. Instead, the price of oil and gasoline are up because the Federal Reserve has driven the value of the dollar down.

For example, if the dollar since 2002 had been as good as the:

• Chinese yuan, the price of oil today would be $82 and a gallon of regular gas would cost about $3.10;

• Euro, the price of oil today would be $77 and regular gas would cost about $2.90;

• Japanese yen, the price of oil today would be $71 and regular gas would cost about $2.75;

• Swiss Franc, the price of oil today would be $63 and regular gas would cost about $2.50.

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I do not get a copy of the emails that scurry through the internet providing talking points for people wishing to discredit the present administration. However there would appear to be at least one that talks about gasoline prices rising as a result of a weak dollar. I suspect this because there have already been several blogs right here at Forbes.com on this very topic, with titles very similar to yours.

Consider Mr. Woodhill’s blog of a few weeks ago entitled “Gasoline Prices Are Not Rising, the Dollar Is Falling” where he makes a nearly identical argument to yours.

Pr. Domitrovic has a very similarly themed piece from last week where the “weak dollar” caused the Great Recession and writing “Oil did even more, retracing the upward march to $35 a barrel it had made in the 1990s, this time not stopping till it crashed through $100.”

Timing is everything in the news business Mr. Kadlec. I will say the same thing to you that I said to them. If your argument were sound, the prices of all things would be increasing. However housing prices continue to fall.

The prices of commodities are driven by supply and demand. There is an oversupply of houses and an under-demand for house so there is downward pressure on prices. In oil, the opposite situation exists. There are specific market forces driving the prices of oil and housing in different directions.

You comment makes my point. As you say, prices move relative to one another because of shifts in supply and demand: oil prices up, housing prices down. This hides from our view and common sense that the dollar itself is changing in value, it too is moving and therefore cannot be treated as a fixed point of reference.

Since December 2002, the average cost of consumer items (as measured by the CPI) has increased 29%, which is to say the value of the dollar in terms of goods and services measured by the index has fallen by 22%.

In other words, if the Federal Reserve had maintained the value of the dollar in terms of the CPI over the past 10 years, oil prices today would be around $80 a barrel, and a gallon of regular gasoline would cost just over $3.00 a gallon.

More likely, since oil tends to sell at a relatively stable ratio to gold, and the relative price of gold has increased with monetary uncertainty over the past 10 years, if the Fed had maintained the value of the dollar in terms of consumer prices, the price of gold, oil and gasoline would be much lower than even this calculation suggests.

If I may add, changes in global supply or global demand do not account for the drastic changes in the price of oil, however the devalutaion of our currency does.

Think of it this way, if we operated in a barter only economy, the value of my labor hour relative to a barrel of oil has not changed.

Now enter dollars as medium of exchange. I trade my labor hour for dollars, but the Federal Reserve has flooded the market full of cheap dollars. What producer of oil would not want more dollars to maintain the sales value of their product and their global purchasing power?

You wrote:”Comparing housing prices to gasoline is a false analogy. Housing prices are not falling everywhere, nor are the declines equal around the country.”

It is not an analogy. Houses and gasoline are both commodities that are bought and sold in the open market for dollars. The price of gasoline has not risen evenly across the country, it has risen some places faster than others. The price of house has dropped some places faster than other. That is the effect of local markets. Market forces, an imbalance between supply and demand, is what is driving up the prices of some commodities in some markets and driving down prices of some commodities in other markets.

You wrote:”If I may add, changes in global supply or global demand do not account for the drastic changes in the price of oil, however the devalutaion of our currency does.”

I believe that you are incorrect, there have indeed be huge changes in the balance of supply and demand in the world, it is called “War with Iran”. Iran is one of the largest producers of crude oil in the world and it is currently not being allowed to sell its crude oil because of sanctions, this reduces supply. Iran is threatening cut the strait of Hormuz which allows a huge portion of the oil from Iraq, Kuwait, and other Persian Gulf. Numerous pipelines from other oil producing nations pass near Iran. This is creating instability in the markets and as result there is increased demand.

You wrote:”This hides from our view and common sense that the dollar itself is changing in value, it too is moving and therefore cannot be treated as a fixed point of reference.”

Of course this is the case, if the price of oil goes up, the value of a dollar relative to a barrel of oil goes down. If the price of a house goes down, the value of a dollar relative to a house goes up. The same is true for any commodity that one can think of, alfalfa, barbie dolls, and computers. There is no “absolute” value for a dollar, it is always relative.

You wrote:”In other words, if the Federal Reserve had maintained the value of the dollar in terms of the CPI over the past 10 years, oil prices today would be around $80 a barrel, and a gallon of regular gasoline would cost just over $3.00 a gallon.”

A barrel (55 gallons) of crude oil (depending upon its “crack spread”) can only produce 10 or 20 gallons of gasoline. The rest is asphalt or kerosine or other petroleum products. It is not possible to sell gasoline for 3 USD/g when it costs 100 USD/barrel (or just under 2 USD/gallon) for crude oil. Nothing the Federal Reserve can do to can the basic laws of petroleum engineering and economics. If the price of crude oil goes up, the price of gasoline goes up.

Iran is a major producer of oil and it is not able to sell its product on the world market because of sanctions. This has reduced supply. Because of uncertainty about the supply, demand has increased – producing an “instability premium”. Supply is down and demand is up, prices of crude oil must rise, the price of gasoline must rise.

This is what Adam Smith and David Ricardo wrote about 200 years ago and it is still true and there is nothing the Federal Reserve can do to change it.

David, You are such an apologist for the Fed’s monetary policy that you must either be a member of the Fed’s Board of Directors, or a cabinet member of this current administration. To so blindly disregard what has been done to the dollar (i.e. flooding the world with trillions more of them), as one of the main culprits in the explosion of gas prices is ignornant at best. Mr. Kadlec is spot on with his analysis, and is correct to point out that this incessant expansion of the money supply is the biggest threat to American liberty today. Unless the Federal Reserve is stopped, this will bring about the demise of America.

So the war with Iran is responsible for the last 10-years of oil price increase.

Jude Wanninski once wrote:

When I wrote the energy editorials for the WSJournal between 1974 and 1978, Yergin, just out of school, began his career as a Harvard energy expert by taking up the Malthusian cry that the world was running out of liquid petroleum and natural gas. He didn’t know what he was talking about then, and he is no better now, permanently fixed in a drop of liquid amber as an energy pessimist. My optimism rests on my early schooling in geophysics, at UCLA, prior to a segue into political science and journalism. That is why the WSJ editorial page from 1974 to 1978 was arguing that there was no energy problem — that the oil crisis had occurred because Richard Nixon took us off the gold standard in 1971 ~ which led Canadian economist Robert Mundell to predict there would soon be a dramatic increase in the price of oil, and thence all other commodities. Supply-side economics was born out of the “energy crisis.”

Is it really such a “wild and crazy” idea that when supply and demand are not in equilibrium that if demand exceeds supply prices will rise (oil) or if supply exceeds demand prices will fall (houses). It seems to me a fairly straight forward big freshman economics. I do not believe that saying that supply and demand influence prices of commodities makes me an apologist for anything other than Adam Smith.